The IMF warns that central banks may have to rethink what constitutes their reserve currency holdings. In a recent study, the global lender points to the changing geopolitical landscape, technological advances and the impact of the Covid-19 pandemic as events likely to influence the composition of reserves.
Advances in Financial Technologies
In addition to the US dollar, other currencies like the Euro, the Japanese and the British pound act as settlement currencies in global trade. Still, the US dollar dominates when it comes to its status as the worldâ€™s reserve currency.
However, in a study, whose findings are shared via the global institutionâ€™s blog, the IMF does say that the pandemic inspired â€œadvances in financial and payment technologiesâ€ will likely â€œimpact the future composition of reserve holdings.â€
According to the authors of the blog, many central bankers are now aware of threats from private issuers of digital money, like Facebookâ€™s Diem. Consequently, some central banks may be attempting to counter this threat by issuing their own digital currencies. The authors write:
Institutions like the European Central Bank and the Peopleâ€™s Bank of China, which are already â€œexploring the issuance of central bank digital currencies,â€ believe that their ultimate success on this front â€œcould increase demand for their currencies.â€ In turn, this increased demand will accelerate the dumping of the US dollar as the preferred global reserve currency.
Superior Technology Prevails
Still, the IMF blog post reminds central bankers that simply issuing a digital currency is no guarantee of its acceptance as another reserve currency. Instead, only â€œsuperior technology platformsâ€ can help new currencies â€œovercome some of the advantages of incumbent currencies.â€ The authors conclude their sentiments on this reserve currency subject saying:
Meanwhile, the blog also identifies the shifts in international finance, the changing trade links and invoicing practices as other factors that could propel the accelerated transformation of the reserve currency status quo.
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